How Does Market Cap Affect Your Financial Strength

Noone able to give clarity here? :frowning:

Read Fiela14’s post. Tier 1 capital is an accounting measure, unaffected by share price. Study the components of SE and how it can change over time.

^ Right. I’m sorry that I confused the issue here by saying that MV and retained equity should have something to do with each other.

I’ll answer the original question - I know nothing of Basel… When the share price goes to/near to zero, you cannot raise any more capital. Banks need to raise capital urgently because they have toxic assets. These toxic assets will wipe out their equity base, leaving them with zero/negative book value. If a bank is well capitalized, their share prices will never fall to zero (otherwise we will have arbitrage if we acquire all the shares and liquidate). If share prices fall, something must be wrong. I once asked a GS guy how does their share prices affect their daily operations. The answer is simple, if your share price plunge, clients will pull their money out and won’t do business with you, fearing you might collapse.

Agree ^ Lower stock price will lead to extreme dilution if more capital needs to be raised. + Basel reporting has not taken effect yet in US. Also, a low stock price like what was witnessed by WM, WB and now NCC & till yesterday SOV puts the debt at risk (smaller cushion). This leads to rating agency downgrades --> increases the cost of debt which hurts especially if the bank has near term debt maturities that needs to be rolled over. For Commercial banks + thrifts, that take in deposits from a) City, Local & State governments & b) Small-mid size businesses generally have covenants attached to those deposits where the credit ratings of generally A- or less triggers a withdrawal.(These deposits are generally much more than the FDIC limits and thus are vulnerable to bank failure) Also, generally, these banks collect large sums of money from customers in terms of Escrows; this is a cheap source of funding for these banks (interest-free). For all escrows collected on mortgages that are FN & FRE guaranteed, the bank needs to maintain a certain level of credit rating (generally A- or better). With rating downgrades, the agencies force the banks to transfer the escrows immediately to a different institution (WM had to transfer them to JPM). And in the end the killer is the large scale negative publicity that accompanies a tanking stock, this leads to deposit outflows even from accounts that are FDIC insured, because your average Joe does not want to deal with the hassle of FDIC and it takes him less that 30 mins to open up accounts across the street in a stronger bank. In the end you are left with an institution, whose assets are illiquid, and the source of funds from extra equity capital to capital market debt to deposits experience rapid runoff. What I described above is the exact sequence of events that happened to WM and to a large extent WB. Between Mar-08 and Sep-08 the base position of the bank did not change. In fact the bank had higher reserves for bad debt, substantially less expenses due to mass layoffs and generally cheaper source of funds due to declining interest rate. The Net interest Margin was higher and the pre-chargeoff, pre tax Net income was higher. What killed them was a stock price which was 60-70% lower.